PHILIPPINE property developer Megaworld Corp. (MEG) reported a nine-month profit that was up 25.6 percent year-on-year from 2014. Megaworld’s share price on the Philippine Stock Exchange is now down 23.5 percent from its historic high, reached in April 2015.
How can that be?
Forget about the stock market. This goes against everything that we believe life should be. The handsomest man gets the prettiest girl. The best team is supposed to win the championship. The smartest kid in the class becomes the life-saving doctor, or the lawyer who works for the oppressed. Good always triumphs over evil—just watch any Star Wars movie.
Maybe the reverse correlation between the earnings growth and share-price movement of MEG has something to do with the “efficient market” theory. This theory says that share price always will, or at least should, reflect corporate value. They gave the Nobel Prize in Economics to someone that says markets are genuinely efficient. The theory that markets are not efficient says that price and value sometimes get out of synch. They gave the economics prize the same year to someone who believes in that concept.
Actually, both theories are opposite sides of the same coin. Value and price will always eventually come together, according to both theories, just in different times. But MEG’s profits have been growing all year.
First-quarter earnings were “disappointing” but was still a “buy” at P5.39 (the price is now P4.41). By the end of the second quarter, year-to-date earnings “beat expectations” and was still a “buy” at P4.59. There is nothing necessarily or inherently wrong with the strategy of buying, as the price goes down as earnings increase. But that does not explain why growing profit does not mean growing price.
Maybe all stock prices move in tandem. The Philippine Stock Exchange Composite Index (PSEi) is down 15.7 percent from the high reached at the same time MEG has its 2015 apex. It is completely normal for some stocks to move more than the index in either direction. If all shares move together, then the idea is to pick those issues that are going to perform more favorably than the index, which also happens frequently.
But this is Megaworld, a PSEi component, and its earnings are up 25.6 percent, which is much better than the average for the PSEi issues. Why isn’t MEG outperforming the PSEi and moving up with its growing earnings, instead of down?
Perhaps, the explanation is that stock prices, in general, are a “leading indicator,” predicting, for example, not what the economy is doing now, but what the economy will be doing six months or more down the road. That would seem to make sense, since the PSEi hit its high long before the economic data showed economic growth was slowing. Maybe MEG’s share-price falling is an indication that its earnings will be lower in the quarters to come.
But, if that is true, then increasing earnings growth does not mean a darn thing. Share price then would seem to reflect future earnings rather than past profits or profit-growth trends. By this “theory,” the fact that MEG shares are down 23.5 percent since April would tell us to expect lower MEG profits early next year, rather than earnings predicting share price.
Maybe we should be “betting” on MEG’s profit growth, rather than “betting” on its share price. Maybe markets are neither efficient nor inefficient but are crystal balls into the future of corporate value. Now, I’m confused.
Perhaps, the reality of stock-price movement is something different altogether. The stock-market gurus and financial-literacy experts tell us that our emotions are what keep us from making money in the market. Use your logic and brains, and you will be richer. The fact that the MEG share price is not following any corporate earnings value should be ignored, I guess. All the intelligent advice from the “experts” constantly seems to work best when prices are in an uptrend—sort of like using a dartboard to pick your stock investments.
In the meantime, logic and corporate earnings be damned. The stock market is going lower, and will continue to go lower until such time that—and I hate to say this—positive investor emotions take over and they start buying shares again. That will come when the last few people decide enough is enough with all the sound fundamental reasons for buying falling stock prices and cut their losses.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.